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Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Baxter International fares in the ModernGraham valuation model.

BAX Chart

BAX data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$69.60
MG Value$58.15
MG OpinionOvervalued
Value Based on 3% Growth$53.20
Value Based on 0% Growth$31.18
Market Implied Growth Rate5.24%
Net Current Asset Value (NCAV)-$13.63
PEmg18.97
Current Ratio1.69
PB Ratio4.47

Balance Sheet - 12/31/2013

Current Assets$10,004,000,000
Current Liabilities$5,906,000,000
Total Debt$8,126,000,000
Total Assets$25,869,000,000
Intangible Assets$6,499,000,000
Total Liabilities$17,406,000,000
Outstanding Shares543,040,000

Earnings Per Share

2013$3.66
2012$4.18
2011$3.88
2010$2.39
2009$3.59
2008$3.16
2007$2.61
2006$2.13
2005$1.52
2004$0.62
2003$1.52
2002$1.74

Earnings Per Share - ModernGraham

2013$3.67
2012$3.60
2011$3.24
2010$2.88
2009$2.95
2008$2.42

Dividend History

BAX Dividend Chart

BAX Dividend data by YCharts

Conclusion:

Baxter International is not suitable for the Defensive Investor, but is suitable for the Enterprising Investor. The company's current ratio is too low and the PB ratio is too high for the Defensive Investor. The Enterprising Investor's only gripe is the debt level relative to the current assets, but the investor type is willing to overlook this because the company passes the other requirements. As a result, Enterprising Investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research. From a valuation perspective, the company has grown its EPSmg (normalized earnings) from $2.95 in 2009 to $3.67 for 2013, but this level of demonstrated historical growth does not quite support the market's implied estimate of earnings growth of 5.24%. As a result, the ModernGraham valuation model returns an estimate of intrinsic value that is below the current price and the company appears to be overvalued.

Disclaimer: The author did not hold a position in Baxter International (NYSE:BAX) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Baxter International